Japan’s ‘Abenomics’ fires first shot in the Rare Earths recovery

The Japanese economy has started to grow for the first time in 20 years and this should help boost the rare earths sector. Japan’s new Prime Minister, Shinzo Abe, was elected on a platform of economic growth and nationalism. Just months into office, Abe-san has been more successful than anyone had expected and the world has coined the new term’ Abenomics’ to describe the growth recipe that has made Abe into the ‘Iron Chef’ of the G8 nations. Japan’s GDP has risen 3.5%, while expectations were for a 2.8% more than the United States. “Abenomics” consists in higher public spending and an expansionary monetary policy; its main effect has been a lower value of the yen compared to the US Dollar (one dollar = 102 Yen). The target – and one that would very well received by the Tokyo stock exchange – is for the Dollar to trade at 100 Yen or lower. Fiscal policies alone do not account for the growth; there is a psychological effect as well; however the low yen has stimulated exports and domestic consumption has also grown, matched by a 0.9% industrial production increase.

The most interesting statistic is that in the month between Abe’s election and December, when he was sworn into office, domestic consumption, which makes up 60% of GDP, rose simply on the expectation of a very strong change in the government’s economic policy. Meanwhile, from December to now, the Nikkei index of the Tokyo Stock Exchange has exploded by 70%, while the Japanese are beginning to flood the rest of the world of their abundant liquidity in search of stocks with the most attractive yields. The rise of the Japanese market, coincidentally, has grown just as US equities have shown signs of a solid rebound. The declining US unemployment statistics and higher spending recorded last April, meanwhile, suggest that Japanese exporters, backed by a lower yen, will find willing consumers. Inflationary cautions aside, Japan’s export driven economic recovery matched by higher demand in the United States should reverse the underperformance trend in the rare earths market. The Japanese automotive sector is one of those slated for the biggest export gains.

The high Yen hit sales of Japanese automobiles hard in the past few years, so hard that Infiniti, Nissan’s high value, high margin brand, contributed almost nothing to the parent company’s profits. Similarly, the lower Yen will make Toyota’s lineup of hybrid vehicles more competitive and hybrids need rare earths. Rare earth intense high tech manufacturing in Japan – and elsewhere – should also grow considerably, which also raise will demand for rare earths while helping to deplete existing inventories of industrial minerals and other metals, which should also help lift rare earth prices. The gains will not go to China alone. Japan’s new government has a very nationalistic character. Abe and his ministers are in no mood to back down on Japan’s sovereignty over the Senkaku / Diaoyu Islands. While, Sino-Japanese hostilities are unlikely to break out into military conflict, diplomatic tension remains, which will further stimulate Japanese industry to diversify its rare earths supply away from China.

Apart from the strategically timed l announcements of Japanese researchers looking for rare earths ‘20,000 leagues’ under the Pacific Ocean, Japan now has alternative rare earth sources. Lynas (ASX: LYC | OTCQX: LYSDY) is producing in a much more stable regulatory environment in Malaysia. Molycorp (NYSE: MCP) is also slated for a production increase as a new processing plant comes on line by the middle of 2013 according to the Company’s Q1 announcement from May 10. China, for its part, is still focused on controlling overcapacity and rationalizing the rare earths and other critical mineral production. Moreover, while diplomatic tensions persist, they have failed to make a dent in business relationships. Japan’s electronics company TDK Corporation said it would form a joint venture to produce rare earth magnets with China’s Guangdong Rising Nonferrous Metals Group. If anything at all, this suggests that demand for rare earths in Japan is strong enough to overcome nationalistic barriers, signaling that a recovery for the rare earths sector as a whole is overdue.

Comments

Obama's ‘red line’ bluff over Syria scares the marketsInvestorIntel

[…] Today, the Tokyo exchange set the mood, closing at -0.69% but experiencing a reversal of ‘Abenomics’, marked by a strengthening of the yen on fears of the fallout from intervention in Syria and […]